Forty-four million Americans owe a collective $1.4 trillion in education debt, a staggering total that works out to just under $40,000 per graduate. Because of the large monthly payment, many borrowers must put off large purchases, like houses and cars. Furthermore, a significant percentage of these loans are in delinquency, which indicates that the borrowers cannot make the minimum payments at all.
Bankruptcy provides relief in two different student loan scenarios.
A Chapter 13 filing triggers the automatic stay under Section 362 of the Bankruptcy Code. Most moneylenders, including most lending institutions and debt buyers, cannot take any adverse action against bankruptcy debtors as long as the cases are pending. That includes the lawsuits and wage garnishments often associated with delinquent student loan accounts. Chapter 13 bankruptcies can last for as long as five years.
Moreover, a bankruptcy attorney can negotiate with a student loan lender or debt buyer for a lower interest rate, principal reduction, and other forms of relief. Additionally, in many jurisdictions, federal judges refer these matters to bankruptcy mediation, where the creditor must negotiate in good faith.
Since lawmakers could not agree about student loans when they revised the Bankruptcy Code in the 1970s, courts followed the Brunner Rule, which came from a 1987 New York court of appeals case. Judges adopted this rule in response to an entirely different set of circumstances than the ones that borrowers face today.
Marie Brunner owed about $9,000 in student loans, a large but not overwhelming sum in the 1970s and 1980s. Furthermore, she filed bankruptcy just one year after graduation and never made any payments toward her debt. In other words, according to the judges, the issue was more unwillingness to repay the debt, as opposed to inability to make payments.
So, the Second Circuit concluded that student loans were dischargeable in bankruptcy if the debtor could prove “undue hardship,” which required a showing that the debtor:
- Could not maintain a minimal standard of living while repaying the loans,
- Had made a good faith effort to repay the loans, and
- Had a permanent or long-lasting hardship.
Essentially, under the Brunner Rule, debtors who have a physical or other disability are eligible for discharge, but other debtors probably do not qualify.
In light of the changed student loan landscape, many courts have either questioned the Brunner Rule or stopped following it altogether But the Seventh Circuit, which covers Illinois and Indiana, has made no such move. In fact, this court recently affirmed the Brunner Rule in 2015’s Tetzlaff v. Educational Credit Management Corporation.
Although Mr. Tetzlaff owed over a quarter million dollars in student loan debt and was basically unemployable due to a variety of issues, the court ruled that he did not meet the “undue hardship” test according to Brunner and therefore he must repay his student loans. There were no dissents, which indicates that the Seventh Circuit will probably not reconsider the Brunner Rule unless the Supreme Court invalidates it.
Rely On Experienced Attorneys
Many distressed student loan borrowers can find relief through bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours appointments are available.